Ch10.0.pptx - Chapter 10 Mechanics of Options Markets 1 10.1 Types of Options Call option = right to buy an asset at a pre-set price(exercise/strike

# Ch10.0.pptx - Chapter 10 Mechanics of Options Markets 1...

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Chapter 10 Mechanics of Options Markets 1
10.1 Types of Options Call option = right to buy an asset at a pre-set price (exercise/strike price ) by a pre-set time (expiration/maturity date ) Put option = right to sell an asset … European option can be exercised only on the maturity date American option can be exercised on or before the maturity date 2
Buy a Call Option 3 Initial stock price S 0 =\$98 Expiration Date T=4 months Time Stock price Strike price K=\$100 Final stock price S T =\$115 Buy call option, pay \$5/share Payoff= \$115 \$100 =\$15 Profit=\$15−\$5=\$10 Final stock price S T =\$85 Payoff=0 Profit=−\$5 S T =\$102 Payoff=? Profit=?
4 Final stock price S T Profit −\$5 \$10 \$20 \$30 \$70 \$80 \$90 \$100 \$110 \$120 \$130 S T =\$100 Payoff=0 Profit=−\$5 S T =\$102 Payoff=\$2 Profit=−\$3 S T =\$85 Payoff=0 Profit=−\$5 S T =\$115 Payoff=\$15 Profit=\$10 S T =? Buy a Call Option (Figure 10.1) Slope = 1
5 Profit −\$7 \$10 \$20 \$30 \$40 \$50 \$60 \$70 \$80 \$90 \$100 Buy a Put Option (Figure 10.2) Final stock price S T Strike price K=\$70 Option premium = \$7 Profit breaks even at S T =\$63 S T =\$55 Payoff=\$15 Profit=\$8 S T >\$70 Payoff=0 Profit=−\$7 Slope = −1
10.2 Option Payoff (Figure 10.5) 6 Payoff Final stock price S T Long Call Long Put Short Call Short Put K K Payoff Long Call Ma 0, 0 x T S K Short Call Min 0, 0 T K S Long Put Max 0, 0 T K S Short Put Mi 0, 0 n T S K

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